India: India Tax Weekly - Budget Edition - 2012

Last Updated: 19 November 2012

1. Tax proposals

1.1 Non-resident / International taxation

(a) Retrospective amendment in source rule regime under section 9 to neutralize the impact of Vodafone decision of Supreme Court in case of indirect transfer of controlling interest in an Indian company.

(b) All notice for show cause/tax assessments already issued in respect of similar transactions have been sought to be validated

(c) Definition of 'property' and 'transfer' to be amended to cover direct or indirect transfer of management or controlling rights in an Indian company for levy of capital gains tax

(d) Non-resident purchaser to withhold tax in case of non-resident to non-resident transactions whether or not there is a residence or place of business or business connection or any other presence in India

(e) Comprehensive amendment in scope of 'royalties' on a retrospective basis to:

(i) deal with controversies in relation to package software/off-the-shelf software and sale of a 'copyrighted software' versus 'right to use copyright' in the software

(ii) include payment for any property whether or not there is any possession or control over such property

(iii) include payment for transmission, up-linking, amplification services by satellite whether or not such process is secret

(f) Specific provision for making tax residency certificate a necessary condition for seeking tax treaty benefits

(g Time period for obtaining information for completion of assessment or reassessment from other country under the provisions of DTAA extended to 1 year instead of 6 months

(h) Income arising in India to a non-citizen, non-resident entertainer, non-resident sportsmen and non-resident sports association will be taxed at 20% of gross receipts instead of 10%

(i) Any meaning assigned to a term used in DTAA but not defined in domestic laws by way of a notification will be effective from the date of coming into force of the DTAA itself

1.2 General anti-avoidance rule ("GAAR")

(a) GAAR was originally conceived for introduction under proposed Direct Tax Code is proposed to be inserted in the extant tax laws to deal with aggressive tax planning

(b) An arrangement main purpose of which is to obtain a tax benefit and satisfies at least one of the four prescribed tests can be declared as an "impermissible avoidance arrangement"

(c) GAAR can be invoked to re-christen a transaction according to its commercial substance as perceived by the tax department by collapsing any fancy structure or

(d) Tax Officer to make a reference to the Commissioner of Income-tax ("CIT") for invoking GAAR. CIT will make a reference to an 'Approving Panel' in case he is not satisfied by the explanation given by the taxpayer in respect of the arrangement (e) Approving Panel will make a declaration whether such arrangement is an 'impermissible avoidance arrangement' or not after hearing the taxpayer (f) Tax Officer will pass an order in terms of such declaration which can be challenged before the Tax Tribunal as the first appellate authority (g) Tax department will constitute an 'Approving Panel' consisting of at least three members of CIT rank and above

1.3 Transfer Pricing

(a) Introduction of advance pricing agreement ("APA") mechanism to offer better assurance, certainty and unanimity of approach in transfer pricing matters

(b) Transfer Pricing Officer ("TPO") empowered to examine an international transaction not reported by the taxpayer even if Tax Officer has not referred such transactions to the TPO

(c) Transfer pricing regulations will be applicable even to domestic transactions between related resident parties exceeding a value of INR 50 million in a year. 'Related persons' will include fellow subsidiaries

(d) Due date for filing Income-tax return in cases involving transfer pricing issues extended to November 30 for non-corporate taxpayers as well

(e) Definition of 'international transaction' will include transactions of business restructuring or reorganization with an associated enterprise whether or not such transactions have a bearing on the profit, income, losses or assets

(f) No adjustment to the price where the variation between the arms length price (arithmetic mean of more than one appropriate price) and transaction price does not exceed 3% of the transaction price

(g) Penalty of 2% of the value of the international transaction in case the taxpayer fails to maintain prescribed documents, information, fails to report any international transaction required to be reported or furnishes any incorrect information/documents

(h) Tax Officer will also be empowered to file an appeal against the order passed in pursuance of directions from dispute resolution panel ("DRP") in respect of objection filed on or after July 1, 2012

(i) DRP will be empowered to enhance the variation and consider any matter or new issues under the draft assessment order whether or not such matter was raised by the taxpayer

1.4 Key transactional tax issues

(a) Any excessive consideration (benchmarked to fair market value of share) received by a closely held company from a resident for issue of shares will be taxed as 'income from other sources' in the hands of the company (excessive share premium to be taxable)

(b) Capital gains — In case sale consideration in respect of a transfer of an asset is not determinable, capital gains tax liability is not attracted due to failure of computation provisions the asset will be taken to be full value of the consideration and capital gains tax liability computed accordingly

(c) Amalgamation of a subsidiary company into a holding company will enjoy capital gains tax exemption even if shares cannot be issued by the amalgamated company (holding company) to itself due to cancellation of shares

(d) Dividends distribution tax (DDT) — removal of cascading effect of DDT paid at 16.22% on distribution of profits by an Indian company extended to multi-tier structure instead of only a two-tier structure

(e) Taxation of gross dividends received by an Indian company from a foreign group company (with atleast 26% participation in it) at a beneficial rate of 15% extended to one more tax year

1.5 Venture capital

(a) Restrictions on SEBI registered venture capital funds to invest only in 9 prescribed sectors for availing pass through status for taxability of income in the hands of investors directly has been removed.

(b) Income-tax to be withheld by venture capital funds on income attributable to investors

(c) Income will be taxable in the hands of investors on accrual basis and there will be no deferral.

1.6 Minimum alternate tax ("MAT")

(a) Profit and loss account prepared by insurance, banking or electricity companies in accordance with the provisions of their respective regulatory Acts will be taken as a basis for computing the book profits under section 115JB

(b) Gains attributable to revaluation of a capital asset will be subject to MAT by adding amount standing in revaluation reserve to book profits

1.7 Alternate minimum tax ("AMT")

(a) AMT proposed to be extended to all persons other than a company such as general partnership, individual, HUF, association of person in addition to LLPs with a threshold exemption in case adjusted total income does not exceed INR 2 million

(b) AMT will be payable in respect of profit linked deductions including tax holidays for special economic zones undertakings

1.8 Tax withholding / tax deducted at source (TDS)

(a) Transferred to withhold tax at 1% in case consideration for purchase of immovable property (other than agricultural land) exceeds INR 5 million in case of property in urban agglomeration and INR 2 million in case of other area

(b) Stamp duty value to be adopted as transaction value

(c) Registrar not to register property unless proof of TDS compliance is furnished

(d) TDS at 10% on remuneration other than salary to a director (sitting fee) (machinery provisions). It is now proposed that in such cases fair market of

1.9 Tax collection at source (TCS)

(a) TCS at 1% of sale consideration to be collected by seller of bullion or jewellery in case of cash sale exceeding INR 0.2 million to any buyer

(b) TCS at 1% of sale consideration to be collected by the seller from the buyer on sale of minerals such as coal, lignite iron ore

(c) TCS will not apply on purchase of minerals for personal consumption

1.10 Black money

(a) Share application money received by a closely held company to be taxed in its hands in case the source of such money in the hands of a shareholder cannot be satisfactorily explained

(b) Income-tax return will be furnished by any resident having asset outside India including any financial interest in a company or signing authority outside India even if not earning any taxable income otherwise

(c) 16 year window to issue notice for re-opening of tax assessment if any income earned from assets located outside India has escaped assessment

(d) No tax deduction for any donation for philanthropic purposes in respect of any sum exceeding INR 10,000 paid in cash

1.11 Sectoral tax implications

1.11.1 Oil n gas

Foreign company to enjoy exemption on income received in India in Indian currency on account of sale of crude oil to any person subject to the following conditions:

(a) Receipt of money is under an agreement or an arrangement which is either entered into by the Central Government or approved by it.

(b) Foreign company and the arrangement or agreement has been notified by the Central Government having regard to the national interest

(c) Receipt of money is the only activity carried out by the foreign company in India

1.11.2 Power

(a) Power producer will be allowed initial depreciation at the rate of 20% of actual cost of new machinery or plant acquired and installed in a previous year.

(b) Extension of tax holiday under section 80(IA) for generation, transmission and distribution and substantial renovation and modernisation of existing network achieved by March 31, 2013 (holiday was expiring on March 31, 2012).

1.12 Weighted deductions and investment linked incentives

(a) Weighted deduction of 200% of the expenditure incurred on approved in-house research and development facilities extended for a period of 5 years up to March 31, 2017

(b) Weighted deduction of 150% of the expenditure incurred on notified agricultural extension projects is proposed

(c) Weighted deduction of 150% of the expenditure incurred on notified skill development projects is proposed

(d) 100% investment- linked deduction proposed to be extended to following business:

(i) Setting up an operating an inland container, depot or a notified container freight station

(ii) Bee-keeping and production of honey and bees wax

(iii) Setting up and operating a warehousing facility for storage of sugar

2. Finance Minister on tax reforms in his budget speech

"26. As Hon'ble Members are aware, the Direct Taxes Code (DTC) Bill was introduced in Parliament in August 2010. It was our earnest desire to give effect to DTC from April 1, 2012. However, we received the Report of the Parliamentary Standing Committee on March 9, 2012. We will examine the report expeditiously and take steps for the enactment of DTC at the earliest. 27. Similarly, the Constitution Amendment Bill, a preparatory step in the implementation of Goods and Services Tax (GST) was introduced in Parliament in March 2011 and is before the Parliamentary Standing Committee. As we await recommendations of the Committee, drafting of model legislation for Centre and State GST in concert with States is under progress."

3. Finance Minister on foreign direct investment in retail sector in his budget speech

"32. Organised retail helps in reducing cost of intermediation due to economies of scale, benefiting both consumers and producers. At present, FDI in single brand and in cash and carry wholesale trade is permitted to the extent of 100 per cent. The decision in respect of allowing FDI in multi-brand retail trade up to 51 per cent, subject to compliance with specified conditions, has been held in abeyance. Efforts are on to arrive at a broad based consensus in consultation with the State Governments."

Published March 17, 2012.

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